As far as I know, free markets rely on well-informed consumers. If this is the case, shouldn't an efficient free market provide consumers as much information as possible about a product so that the consumer can accurately tell the market what they want?

E.g., some people pay more for organic milk. They know which product is organic since it's labelled. What people might not know is whether or not organic milk produces more Co2e to produce per litre. Assuming for the sake of the question that organic milk is more carbon intensive due to reduced yields, how are consumers supposed to know this and weigh up whether they care more about greenhouse gas emissions or animal welfare when buying milk?

Or to take another example. The difference between top-end smartphones is basically the same, but if one product's supply-chain information included "made with child labour and Uigher slaves in concentration camps", people could factor that into their purchasing decision.

I'm not a well-informed consumer. I know I'm not, but there's not a lot I can do about it. (How am I, as a consumer, supposed to find out whether the pair of jeans I'm about to buy is made of cotton from a plantation which is destroying the Aral sea?) But I thought the free market relied on well-informed consumers pushing the market in certain directions. If that's the case, shouldn't products be accompanied with as much information as possible so consumers can make the best choice?

Obviously companies won't advertise the fact they use slave labour voluntarily, so shouldn't an efficient free market be accompanied by the kind of regulation which makes this idea of maximum information possible?

  • $\begingroup$ "shouldn't an efficient free market provide consumers as much information as possible about a product so that the consumer can accurately tell the market what they want?" By 'free market', do you mean 'company'? $\endgroup$
    – afreelunch
    Feb 11 at 16:43
  • $\begingroup$ Sorry that's just me using lazy phrasing. "In an efficient free market should companies provide maximum information to consumers". Or "would companies providing maximum information to consumers increase efficienct of a free market". $\endgroup$
    – thosphor
    Feb 11 at 16:49
  • $\begingroup$ An efficient free market will deliberately withhold information in many cases. The organic milk seller doesn't want consumers to know its production produces more carbon. The phone manufacturer doesn't want consumers to know it uses slave labour. $\endgroup$
    – user253751
    Mar 15 at 12:15
  • $\begingroup$ @user253751 is that a free market then? I thought free markets work on the basis of an informed consumer. How can these markets efficiently give consumers the best products if consumers don't really know about the products they're buying? $\endgroup$
    – thosphor
    Mar 15 at 16:29
  • $\begingroup$ @thosphor they can't, but don't let free market advocates hear you say it $\endgroup$
    – user253751
    Mar 15 at 16:56

There is an argument to be made that markets work better if there is as little information asymmetry between buyers and sellers as possible. In fact this is so basic insight that you will see it mentioned in pretty much any economics 101 textbook, for example see Mankiw Principles of Economics chapter on asymmetric information. This is in fact the economic rationale for why modern product packages come with such a cornucopia of information about the content of a product you buy (especially when it comes to food).

However, in the example above signaling and providing information is essentially costless (companies usually already know what they put into their products - and labels are orientational which is accurate enough - its not that every package of cereal is examined in lab individually). When it is very costly to determine how exactly the goods are produced, the case is less clear cut (it would depend on empirical comparison of cost & benefits). For example, due to complex supply chains company in US subcontracting to China might not necessarily know about conditions of subcontractor. Requiring all firms by law to have full and complete monitoring of all supply chains might lead to costs that potentially outweigh the benefit of such regulation (again this would require some empirical investigation).

In addition, while it is completely true that:

Obviously companies won't advertise the fact they use slave labour voluntarily

the converse does not hold. Firms have incentive to advertise that they do not use slave labor and so on and hence why so many firms pay money to external auditors to get the privilege of putting 'fair trade' or 'bio' labels on their products.

This does not mean that government regulation of such labels could not potentially be welfare enhancing. That would require further investigation of particular case, it just means it is not necessary a priori without any further investigation to assume it necessarily requires additional regulation (although my guess is you could probably justify it in non-trivial number of cases after empirical investigation).

  • $\begingroup$ I take your point about "fair trade" or "slavery-free" labels which exist on some products - but these are the result of whims of public pressure. I think my organic milk example shows this too - without the full picture we still can't make an informed decision. Public whims change over time and so will the information comapanies choose to put on their packaging. $\endgroup$
    – thosphor
    Feb 11 at 16:55
  • $\begingroup$ @thosphor well 'public whims' depend on what consumers demand, if most do not care about slave labor then having that info wont make any significant difference and there is no case for additional labeling (e.g if there is just 1 allergic person then from social welfare perspective it makes no sense to make special legislation)- yet providing it would still be costly. The case for gov intervention is mainly where there is clearly great demand for that information and firms could provide it at lower cost than benefits but they dont (e.g. perhaps they are monopolies so there is no competition) $\endgroup$
    – 1muflon1
    Feb 11 at 17:05
  • $\begingroup$ I'm not particularly convinced. People care about slavery because a journalist will have done and investigation so it enters public consciousness. Relying on a journalist or think-tank having the will and resources to uncover various topics like this to bring them to the public attention seems very inefficient to me. $\endgroup$
    – thosphor
    Feb 12 at 8:48
  • $\begingroup$ @thosphor well I am not trying to convince you but to explain you the science behind informational asymmetry - that is why I also provided references to textbook where you can learn more about the topic of informational asymmetry in general as giving you full primer on economics of informational asymmetry would be too broad for SE. I personally think that the above gives fair overview of the scientific literature which boils down to that this regulation is optimal when the cost outweigh benefits and give you some examples of how that works $\endgroup$
    – 1muflon1
    Feb 12 at 9:42

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